Rules, rules, rules

German politicians warn Italy’s new government

main 23317902 Reuters – Stock exchange index Germany Italy coalition euro zone risks sovereign debt crisis Giuseppe Conte Five Star Movement Lega Nord
Germany's horror scenario. Source: Reuters

Eckhard Rehberg, a member of Chancellor Angela Merkel’s Conservatives, didn’t mince words: “Italy is playing with fire and is endangering the euro zone.” The budget expert of the Christian Democrats told news agency DPA Italy’s new populist coalition was at risk of taking on even more debt: “The country should draw the right conclusions from Europe’s recent sovereign debt crisis. It cannot ignore its own financial facts.”

Rome’s economic reality isn’t too rosy: The Mediterranean country has €2.26 trillion in government debt, the highest in the European Union. Its debt to GDP quotient of 132 percent trails only Greece’s 180 percent. The maximum allowed by the stability pact is 60 percent. Unemployment is also high at 11.2% and economic growth has lagged behind the European average (see graphics below).

Italy’s incoming coalition, made up of the populist Five Star Movement and the euro-skeptic League, does not see this as an obstacle. After federal elections in March, they presented heavy spending plans last week, including tax cuts, pension reform, and a universal basic income, which could add €93 billion to government expenditure. It would triple the deficit-to-GDP ratio from its current 2.5 percent.

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The new Italian coalition, which still needs to win presidential approval of its prime minister candidate, also wants to make limits on debts and deficits – the so-called stability pact – more flexible. Germany and other frugal-minded euro-zone countries fought hard to get these rules in place in 1999, when the euro was first introduced. When Greece admitted at the end of 2010 that it had violated the rules for years, crisis erupted in the 19-nation euro zone and Europe had to bail out the indebted countries of Greece, Portugal and Ireland. Germany, as the euro zone’s largest economy, had to foot the biggest part of the bill.

With this horror scenario in mind, other German politicians showed an allergic reaction to Italy’s spending plans, just like Mr. Rehberg. “The (Italian) government’s benchmarks are the European commitments,” said Axel Schäfer, a member of the European Parliament for the German Social Democrats. “There will only be stability when one sticks to the rules.”

Achim Post, a Social Democratic leader in the German Bundestag, told Reuters: “European policy doesn’t function on the ‘wish-for-something’ principle, but is based on a fair balance of interests.” Even a populist, nationalist government has to play by the rules, he said.

Christian Democrat representative Katja Leikert said: “The new Italian government is not sending a good first signal to its European partners.” At the same time, she voiced optimism, saying Italy has historically been pro-European, so other members are counting on it to keep a sense of solidarity and adhere to EU rules.

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Whether Italy’s populist Five Star Movement and the far-right League can turn their spending plans into reality depends on Italian President Sergio Mattarella. He has to approve the parties’ prime minister candidate, Giuseppe Conte, an attorney and law professor at the University of Florence without political experience.

The concerns of German lawmakers will likely have no impact on their Italian counterparts, but investors could have. The yield gap between Italian and German 10-year government bonds, a measure of how risky Italian debt is, shot up to 164 basis points from 130 in just a few days. Investors wiped out nearly €23 billion in market capitalization on the Milan stock exchange as coalition policies emerged. President Mattarella will consider all these developments when he announces whether to accept Mr. Conte as prime minister.

Regina Krieger is Rome correspondent for Handelsblatt. Jens Münchrath reports on the economy and monetary policy from Düsseldorf. Darrell Delamaide and Gilbert Kreijger are editors for Handelsblatt Global. To contact the authors: krieger@handelsblatt.com, muenchrath@handelsblatt.com, d.delamaide@extern.handelsblatt.com and kreijger@handelsblatt.com

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